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Where great investment ideas clash, and hypes and gripes about working on Wall Street battle it out for bragging rights – The Brainstorm delivers unabridged, unedited insights from the trenches of the independent investment research world.

Thursday, May 1, 2008

Farewell to Desk Jockeys: Show Me The Money!

The era of desk jockeys seems to be coming to a close as institutional investors push research providers to go far beyond critiquing company earnings and writing up ratings based on quarterly estimates. With a struggling economy breathing down their necks, investors are putting the pressure on analysts to show them the money and give them the edge. But what’s really changing? Can the research world adapt?

Some might argue that independent research providers (IRPs) have been waiting a long time for this opportunity to shine and truly show how their value stacks up against their Wall Street brethren.

Bloomberg News recently published an article by Peter Robison (“What’s Analyst Worth, Not a Penny as Estimates Miss”) which discussed how Wall Street analysts were missing estimates based on a trend of inaccuracy and anti-sell mentality. The problem for those analysts is unfortunately often well outside of their control, and rather dictated by their firms and compliance rules – they are expected to sit at their desks and write, and to ‘fill in’ a research report template. These strangle-held analysts are seldom able to think outside of the box or to expand the scope of their analysis to include information that can set their research apart from their Wall Street competitors. This scenario presents tremendous opportunity for independent analysts who deliver insights that “fall through the cracks” in the Wall Street research silos.

Most independent analysts know that sifting through earnings reports, judging company profiles and keeping an eye on trends is only the bare minimum – a starting point. While waiting on GE earnings, you might find a Wall Street analyst locked up to the point that he’s flicking the top of his Dwight Schrute bobble-head and running his eyes to a rearview monitor mirror every time a coworker passes by.

On the flip side, you’d find an independent analyst walking the factory floors, speaking to government officials, competitors, customers, and any and all sources able to pave the way to the most actionable investment insight. These analysts acquire unique credibility in their sector while always delivering more to their clients.

“Necessary Evil”

Obviously, those who consider analysts a “necessary evil” have never had the kind of relationship that they should be having with their analysts. Reading that, it would seem as though receiving potentially profitable information is a chore. Cut the cord – if you’re not happy, then you should only need to take the trash out once. If an analyst doesn’t show you the money, then it’s probably time to show him the door.